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3rd Circuit Upholds Conversion Of Skinner Bankruptcy To Chapter 7

PHILADELPHIA - (Mealey's) A bankruptcy court has the authority to determine at the disclosure statement stage that a Chapter 11 reorganization plan is unconfirmable without first holding a confirmation hearing if it is obvious that the plan is patently unconfirmable, the Third Circuit U.S. Court of Appeals held July 25 in a precedential opinion, finding that a Pennsylvania federal bankruptcy court did not err in converting Skinner Engine Co.'s Chapter 11 case to Chapter 7 because Skinner's reorganization plan was patently unconfirmable (In re: American Capital Equipment, et al., Nos. 10-2239, 10-2240, 3rd Cir.; 2012 U.S. App. LEXIS 15333).

Until the 1970s, Skinner manufactured steam engines and component parts that contained asbestos and were used on merchant ships. Beginning in the 1980s, it was named in asbestos personal injury actions. Skinner was purchased by American Capital Equipment (ACE) in 1998, and in 2001, Skinner and ACE filed voluntary Chapter 11 bankruptcy petitions in the U.S. Bankruptcy Court for the Western District of Pennsylvania.

In 2009, Bankruptcy Judge M. Bruce McCullough rejected Skinner's fifth modified plan of reorganization and converted the Chapter 11 case into a Chapter 7 petition, saying Skinner and the asbestos claimants were unable to effectuate a confirmable plan within a reasonable period of time. The bankruptcy judge also found that the disclosure statement would operate to breach the companies' insurance policies, did not operate as a reasonable and good faith settlement under state law and was the result of collusion.

Skinner appealed to the U.S. District Court for the Western District of Pennsylvania. In March 2010, Judge Gary L. Lancaster affirmed the Bankruptcy Court's ruling, saying that there was no clear error and that he would reach the same conclusion. The judge said Skinner would never be able to propose a feasible plan in good faith pursuant to U.S. Bankruptcy Code requirements because no settlement of asbestos claims could qualify as reasonable. The judge said that asbestos-related litigation was not listed as a factor leading Skinner to seek bankruptcy and that no claimant ever successfully prosecuted an asbestos claim against Skinner. Also, Judge Lancaster held, the bankruptcy judge did not abuse his discretion in converting the case to a Chapter 7 case because conversion will be in the best interest of the creditors.

In an opinion written by Circuit Judge D. Michael Fisher and joined by Circuit Judge Thomas I. Vanaskie and Senior Circuit Judge Jane Richards Roth, the Third Circuit affirmed the lower courts' rulings, finding that a bankruptcy court can address the issue of plan confirmation where it is obvious at the disclosure statement stage that a later confirmation hearing would be futile because the plan described by the disclosure statement is patently unconfirmable.

"If no dispute of material fact remains and if defects cannot be cured by creditor voting or otherwise, then there is 'nothing in either the language or logic of the [Bankruptcy] Code requiring the court or parties to "grind the same corn a second time," and we will not read into the Code the requirement of redundancy,'" the panel said, quoting In re Acequia, Inc. (787 F.2d at 1358-1359 [9th Cir. 1986]).

Not Feasible

The panel then found that the lower courts did not err in holding that Skinner's reorganization plan is unconfirmable because the plan is not feasible under Section 1129(a) of the Bankruptcy Code and was not proposed in good faith.

The only source of funding for Skinner's plan is a surcharge that would give Skinner the right to 20 percent of cash from insurance actions and policies to pay creditors through a Plan Payment Fund and fund the claims resolution process called the Court Approved Distribution Procedures (CADP), the panel said. The plan depends on the assumption that asbestos claimants will choose to use the CADP rather than the court system, and even then the plan will succeed only if enough asbestos claimants who use the CADP win recoveries and contribute sufficient surcharge funds to the Plan Payment Fund, the panel said.

"This Plan is highly speculative, to say the least, not only because it is contingent on potential litigation winnings, but also because most of the [asbestos] claims have been administratively dismissed," the panel held. "The Fifth [amended] Plan is simply not reasonably likely to succeed and therefore, is not feasible. Furthermore, the feasibility issue cannot be cured, and no dispute of material fact remains, because Appellants admit that no plan will work without a Surcharge."

Conflict Of Interest

The appellate panel further found that the plan was not proposed in good faith because it will not fairly achieve the Bankruptcy Code's objectives. The panel said the plan establishes a conflict of interest "under circumstances that are especially concerning."

Under the plan, the panel said, the only way that creditors and attorneys can be paid is if asbestos litigants win settlements against Skinner and pay the surcharge, and because the settlements will require Skinner's involvement since the question of asbestos claimants' exposure to Skinner products is still at issue, Skinner would be required to cooperate in its defense when it will have incentive to do otherwise, the panel said.

"Second, we are troubled by the fact that the CADP system creates this inherent conflict, while at the same time severely limiting or eliminating Insurers' ability to take discovery, submit evidence, contest causation, or appeal a decision, and all without the protective channeling injunction of § 524(g)," the panel said. "In fact, Appellants do not cite to any examples of confirmed bankruptcy plans that sought to pay creditors using insurance dollars intended to compensate Asbestos Claimants for their personal injuries."

Counsel

The debtors are represented by Robert M. Horkovich of Anderson, Kill & Olick in New York and Sally E. Edison of McGuireWoods in Pittsburgh. Bartel is represented by Douglas A. Campbell and Erik Sobkiewicz of Campbell & Levine in Pittsburgh and Alan Kellman of The Jaques Admiralty Law Firm in Detroit.

Century Indemnity and Pacific Employers are represented by John W. Burns of Dickie, McCamey & Chilcote in Pittsburgh and Leslie A. Davis, Leslie A. Epley and Mark D. Plevin of Crowell & Moring in Washington, D.C. Continental Casualty and Continental Insurance are represented by David C. Christian and Jason J. DeJonker of Seyfarth Shaw in Chicago, Cushing O. Condon and Andrew I. Mandelbaum of Ford, Marrin, Esposito, Witmeyer & Gleser in New York and David K. Rudov of Rudov & Stein in Pittsburgh. Fairchild is represented by Erik Sobkiewicz of Campbell & Levine in Pittsburgh and Zakarij O. Thomas of Buchanan Ingersoll & Rooney in Pittsburgh.

Great American is represented by Peter B. Ackerman of Crowell & Moring in Washington, Jeff D. Kahane and Russell W. Roten of Duane Morris in Los Angeles and Jeffrey W. Spear and Joel M. Walker of Duane Morris in Pittsburgh. Hartford and First State are represented by Steven Bennett, Craig Goldblatt, Caroline Rogus and Danielle M. Spinelli of Wilmer Cutler Pickering Hale & Dorr in Washington; Timothy K. Lewis, Eric T. Smith, Paul H. Titus and Robert J. Williams of Schnader Harrison Segal & Lewis in Pittsburgh; James P. Ruggeri of Shipman & Goodwin in Washington; and Sambhav N. Sankar of U.S. Department of Justice in Washington.

National Union is represented by Greg Bernhard, Michael S. Davis and Yoav M. Griver of Zeichner, Ellman & Krause in New York and Beverly W. Manne and Michael A. Shiner of Tucker Arensberg in Pittsburgh. Fireman's Fund is represented by Robert A. Arcovio and Kyle T. McGee of Margolis Edelstein in Pittsburgh, Leslie A. Epley and Mark D. Plevin of Crowell & Moring in Washington and Michael A. Kotula and Lawrence A. Levy of Rivkin Radler in Uniondale. Liberty Mutual is represented by Alan S. Miller of Picadio, Sneath, Miller & Norton in Pittsburgh and Robert B. Millner of SNR Denton US in Chicago. Hartford is represented by Craig Goldblatt and Danielle M. Spinelli of Wlmer Cutler Pickering Hale & Dorr in Washington and Robert J. Williams of Schnader Harrison Segal & Lewis in Pittsburgh.

The Official Committee of Unsecured Creditors is represented by Kimberly A. Coleman and John M. Steiner of Leech, Tishman, Fuscaldo & Lampl in Pittsburgh. The FCR is represented by Robert S. Bernstein of Bernstein Law Firm in Pittsburgh. The Maritime Asbestosis Legal Clinic is represented by Erik Sobkiewicz of Campbell & Levine in Pittsburgh. Sikirica of Gibsonia, Pa., is pro se.

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